Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

No Archegos or Greensill exposure for Credit Suisse’s operational risk cat bonds


Having once been considered at-risk, due to perceived potential exposure to sponsor Credit Suisse’s challenges related to Archegos and Greensill Capital, we’ve learned that the Operational Re III Ltd. operational risk catastrophe bond was matured, redeemed early and investors repaid in full, while going forwards the latest issuance has no exposure to these events.

credit-suisse-logoBack in 2021, we reported that the most junior tranche of the Operational Re III Ltd. operational risk catastrophe bond was being viewed by investors and holders as potentially at-risk due to the Archegos and Greensill Capital issues sponsor Credit Suisse faced.

As the Operational Re series of insurance-linked securities (ILS) deals provide Credit Suisse with a source of broad-based operational risk insurance capacity, from the capital markets and using a catastrophe bond structure, it was natural there would be some concerns over possible exposure to these issues.

The result was a marking down of some of the Operational Re III operational risk cat bond notes, driven by the Archegos and Greensill Capital issues that Credit Suisse had faced, which had cost the investment bank significant sums.

Credit Suisse lost billions due to the collapse of family office Archegos, which had borrowed huge sums from the bank and this was followed by the Greensill Capital issue, which saw supply-chain finance funds managed by Credit Suisse facing large losses, some of which it had to repay.

Which investors in the notes had thought could be the kind of incident an operational risk catastrophe bond may have been designed to cover.

With Credit Suisse having sponsored the issuance of a just over $217 million Operational Re IV Ltd. cat bond at the start of 2023, we wanted to look into how these legacy events had affected the older vintage and also whether there was any risk remaining from Archegos and Greensill that ILS and cat bond investors needed to be aware of.

Because of the perceived risks of these issues, we understand that one tranche of the Operational Re III notes traded down for bids as low as 60 cents on the dollar at one time, while others were marked down as much as 15 cents.

Even right towards the latter-weeks of 2022, we’re told the Operational Re III cat bond notes remained marked down further than would normally be anticipated (even given this year’s spread widening), suggesting there was still some uncertainty and perhaps nerves over whether the notes could face any losses due to the aforementioned events.

However, we’ve now learned that the Operational Re III notes were redeemed early, at par, which was one-year before their scheduled maturity.

Sources close to the deal have told us that realised annual covered losses never actually reached 4% of the attachment point for the riskiest layer of notes, so as a result all investors received their money back on maturity, while insurance and reinsurance interests were released from their liabilities.

The early redemption aligns with how these Credit Suisse operational risk cat bonds have been run in the past, with a new series issued and then the early redemption of the previous vintage.

Which then raises the question, are the new Operational Re IV operational risk cat bond notes exposed to prior or ongoing events, in any way?

The answer is no.

We’re told by sources that the underlying insurance policy to the Operational Re IV catastrophe bond excludes any losses linked to operational risk events that were already discovered prior to the January 3rd 2023 issuance date.

The policy also excludes losses from any new operational risk event that has the same originating cause as one discovered prior to issuance, as well as any causally inter-related or inter-connected operational risk events.

So investors in the new Operational Re IV went into the transaction safe in the knowledge that there was no potential exposure to the high-profile events Credit Suisse had faced, nor that anything related or connected could affect the notes in future.

Also of note, we’re told that one update to the Operational Re IV cat bond, over the previous iterations, was the inclusion of a specific clause to exclude the territories of Russia and Belarus from the underlying insurance policies coverage.

Which aligns with war-related exclusions that have been enforced across the global insurance and reinsurance market.

You can read all about the new Operational Re IV Ltd. deal in our comprehensive catastrophe bond and related ILS Deal Directory.

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